Forecast | Future of taxation: Future of the economy P7

Are we individualist or collectivist? Do we want our voice to be heard by our vote or by our pocket book? Should our institutions serve everyone or serve those who paid for them? How much we tax and to what we apply those tax dollars to says a lot about the societies we live in. Taxes are a reflection of our values.

Moreover, taxes aren't stuck in time. They shrink, and they grow. They're born, and they're killed. They make the news and are shaped by it. Where we live and how we live are often shaped by the taxes of the day, and yet they often remain invisible, operating in plain sight yet under our noses.

In this chapter of our Future of the Economy series, we’ll explore how future trends will impact how future governments decide to shape future tax policy. And while it’s true that talking about taxes may cause some to reach for their nearest grande cup of coffee, know that what you’re about to read will have a significant impact on your life over the coming decades.

(Quick note: For the sake of simplicity, this chapter will focus on taxation from developed and democratic countries whose revenue largely comes from income and social security taxes. Also, these two taxes alone often make up 50-60% of tax revenue for the average, developed country.)

So before we take a deep dive into what the future of taxes will look like, let’s start by reviewing a few of the trends that will have an outsized impact on taxation in general over the coming decades.

Less working age people generating income taxes

We explored this point in the previous chapter, as well as in our Future of Human Population series, that population growth in most developed nations is declining and that the average age in these countries is set to become geriatric. Assuming that age extension therapies don’t become widespread and dirt cheap globally within the next 20 years, these demographic trends could result in a significant percentage of the developed world’s workforce heading into retirement.

From a macroeconomic perspective, this means the average developed nation will see a decline in total income and social security tax funds. Meanwhile, as government revenues fall, nations will see a simultaneous surge in social welfare spending by way of old age pension withdrawals and geriatric health care costs.

Basically, there will be too many seniors spending social welfare monies than there will be young workers paying into the system with their tax dollars.

Less employed people generating income taxes

Similar to the point above, and covered in detail in chapter three of this series, the increasing pace of automation will see a growing number of the working-age population become technologically displaced. In other words, a growing percentage of working age people will become economically useless as robots and artificial intelligence (AI) take over an ever-larger slice of available work via automation.

And as wealth concentrates into fewer hands and as more people are pushed into part-time, gig economy work, the total amount of income and social security tax funds governments can collect will be cut that much more.

Of course, while it may be tempting to believe that we’ll tax the rich more heavily by this future date, the blunt reality of modern and future politics is that the rich will continue to buy enough political influence to keep taxes relatively low on their earnings.

Corporate taxation set to fall

So be it due to old age or technological obsolescence, the future will see fewer people paying income and social security taxes compared to the norm today. In such a scenario, one might rightly assume that governments would try to make up this deficit by taxing corporations more heavily on their income. But here too, a cold reality will shut down that option as well.

Since the late 1980s, multinational corporations have seen their power grow considerably in comparison to the nation states that host them. Corporations can move their headquarters and even their entire physical operations from country to country to chase after the profits and efficient operations their shareholders pressure them to pursue on a quarterly basis. Obviously, this also applies to taxes. An easy example is Apple, a US company, it shelters much of its cash overseas to avoid the high corporate tax rates it would otherwise pay if the company allowed that cash to be taxed domestically.

In the future, this tax dodging problem will only get worse. Real human jobs will be in such hot demand that nations will compete against each other aggressively to lure corporations to open offices and factories under their home soil. This nation-level competition will result in significantly lower corporate tax rates, generous subsidies, and lenient regulation.

Meanwhile, for small businesses—traditionally the largest source of new, domestic jobs, governments will invest heavily so that starting a business becomes easier and less financially risky. This means lower small business taxes and better small business government services and government-backed financing rates.

Whether all these incentives will actually work to blunt tomorrow’s high, automation-fuelled unemployment rate remains to be seen. But thinking conservatively, should all these corporate tax breaks and subsidies fail to generate results, that would leave governments in a fairly dicey position.

Funding social welfare programs to maintain social stability

Okay, we know that around 60 per cent of government revenue comes from income and social security taxes, and now we also recognize that governments will see that income drop significantly as fewer people and fewer corporations pay these types taxes. The question then becomes: How the hell are governments going to afford to fund their social welfare and spending programs in the future?

As much as conservatives and libertarians love to rile against them, government-funded services and our collective social welfare safety net have served to cushion us against crippling economic devastation, societal decay, and individual isolation. More important, history is littered with examples where governments that struggle to afford basic services shortly thereafter slide into authoritarian rule (Venezuela, as of 2017), fall into civil war (Syria, since 2011) or collapse entirely (Somalia, since 1991).

Something's got to give. And if future governments see their income tax revenue dry up, then broad (and hopefully innovative) tax reforms will become inevitable. From Quantumrun's vantage point, these future reforms will manifest through four general approaches.

Enhancing tax collection to fight tax evasion

The first approach to collecting more tax revenue is simply to do a better job of collecting taxes. Every year, billions of dollars are lost due to tax evasion. This evasion happens at the small scale among lower income individuals, often due to incorrectly filed tax returns brought on by overly complex tax forms, but more significantly among higher income individuals and corporations who have the means to shelter money overseas or through shady business dealings.

A 2016 leak of over 11.5 million financial and legal records in what the pressed named the Panama Papers revealed the extensive web of offshore shell companies the rich and influential use to hide their income from taxation. Likewise, a report by Oxfam found that the 50 biggest US companies are keeping roughly $1.3 trillion outside the US to avoid paying domestic corporate income taxes (in this case, they are doing so legally). And should tax avoidance be left unchecked for a prolonged period, it can even become normalized at a societal level, as seen in countries like Italy where nearly 30 per cent of the population actively cheat on their taxes in some manner.

The chronic challenge with enforcing tax compliance is that the amount of funds being hidden and the number of people hiding said funds always dwarfs what most national tax departments can effectively investigate. There just aren’t enough government tax collectors to service all the fraud. Worse, widespread public contempt for tax collectors, and the limited funding of tax departments by politicians, isn’t exactly attracting a flood of millennials to the tax collection profession.

Luckily, the good folks who do slog it out in your local tax office will increasingly get creative in the tools they use to more efficiently catch tax fraud. Early examples in the testing phase include simple-to-scary tactics, such as:

Mailing tax dodgers notices informing them that they are in the very small minority of people who haven't paid their taxes—a psychological trick mixed with behavioral economics that makes tax dodgers feel left out or in the minority, not to mention a trick that saw significant success in the UK.

Monitoring the sale of luxury goods by individuals nationwide and comparing those purchases to said individuals' official tax returns to spot fishy income disclosure—a tactic that is beginning to work wonders in Italy.

Monitoring the social media of famous or influential members of the public and comparing the wealth they flaunt with said individuals’ official tax returns—a tactic used in Malaysia to great success, even against Manny Pacquiao.

Forcing banks to notify tax agencies whenever someone makes an electronic transfer outside of the country worth $10,000 or more—this policy has helped the Canadian Revenue Agency crack down on offshore tax evasion.

Using artificial intelligence powered by government supercomputers to analyze mountains of tax data to improve non-compliance detection—once perfected, a lack of human manpower will no longer limit the ability of tax agencies to detect and even predict tax evasion among the general population and corporations, regardless of income.

Finally, in future years, should select governments face extreme fiscal challenges, there is a high likelihood that extremist or populist politicians may come to power who may decide to change the laws or criminalize corporate tax evasion, going so far as to seize assets or imprison corporate executives until offshore monies are returned to the company’s home soil.

Shifting away from income tax dependency to consumption and investment taxes

Another approach to improving tax collection is to simplify taxation to a point where paying taxes becomes effortless and dummy proof. As the quantity of income tax revenues begins to shrink, some governments will experiment with removing individual income taxes altogether, or at least removing them for everyone except those extreme wealth.

To make up for this revenue shortfall, governments will begin focusing on taxing consumption. Rent, transportation, goods, services, spending on the basics of life will never become unaffordable, both because technology is making all of these basics cheaper year-on-year and because governments would rather subsidize spending on such necessities than risk the political fallout of a sizeable portion of their population falling into absolute poverty. The latter reason is why so many governments are currently experimenting with the Universal Basic Income (UBI) that we covered in chapter five.

This means governments that haven’t already done so will establish a provincial/state or federal sale tax. And those countries that already have such taxes in place may opt to increase such taxes up to a reasonable level that would make up for the loss of income tax revenues.

One predictable side effect of this hard push toward consumption taxes would be an increase in black market goods and cash based transactions. Let’s face it, everyone likes a deal, especially a tax-free one.

To combat this, governments around the world will begin the process of killing cash. The reason is obvious, digital transactions always leave a record that can be tracked and ultimately taxed. Parts of the public will fight against this move to digitize currency for reasons around protecting privacy and freedom, but ultimately the government will win this future battle, privately because they’ll desperately need the money and publicly because they’ll say it will help them monitor and curtail transactions related to criminal and terrorist activity. (Conspiracy theorists, feel free to comment.)

New taxation

Over the coming decades, governments will apply new taxes to address budget shortfalls that relate to their specific circumstances. These new taxes will come in many forms, but a few that are worthwhile to mention here include:

Carbon tax. Ironically, this shift to consumption taxes may spur the adoption of a carbon tax that conservatives have often opposed. You can read our overview of what a carbon tax is and its benefits in full here. For the sake of this discussion, we’ll summarize by saying that a carbon tax would likely be enacted in place of, not on top of, a national sale tax in order to achieve broad public acceptance. Furthermore, the main reason why it will be adopted (aside from the various environmental benefits) is that it’s a protectionist policy.

Should governments depend heavily on consumption taxes, then they are incentivized to ensure that the vast majority of public spending occurs domestically, ideally spent on local businesses and corporations based in the country. Governments will want to keep as much money circulating within the country instead of flowing out, especially if much of the public's future spending money comes from a UBI.

Therefore, by creating a carbon tax, governments will create a tariff in the guise of an environmental protection policy. Think about it: With a mature carbon tax, all non-domestic goods and services will cost more than domestic goods and services, since technically, more carbon is spent transporting a good overseas than if said good was manufactured and sold domestically. In other words, the future carbon tax will be rebranded as a patriotic tax, similar to President Trump’s ‘Buy American’ slogan.

Tax on investment income. Should governments take the extra step of slashing corporate income taxes or removing them outright in an effort to incentivize domestic job creation, then these corporations may find themselves under increased investor pressure to either IPO or pay out dividends to individual investors who themselves are likely to see reduced or cut income taxes. And depending on the country and its relative economic health amidst the automation age, there is a good chance that earnings from these and other stock market investments will face increased taxation.

Estate tax. Another tax that may become prominent, especially in a future filled with populist governments, is the estate (inheritance) tax. Should the wealth divide get so extreme that entrenched class divisions form similar to the aristocracy of old, then a larger estate tax would be an effective means of wealth redistribution. Depending on the country and the severity of the wealth divide, further wealth redistribution schemes will likely be considered.

Taxing robots. Again, depending on how extreme future populist leaders are, we could see the implementation of a tax on the use of robots and AI on the factory floor or office. While this Luddite policy will have little effect on slowing the pace of job destruction, it is an opportunity for governments to collect tax revenue that can be used to fund a national UBI, as well as other social welfare programs for the under- or unemployed.

Needing fewer taxes in general?

Finally, one underappreciated point that’s often missed, but was hinted at in the first chapter of this series, is that governments in future decades may find that they actually need less tax revenue to operate relative to today.

Note that the same automation trends impacting modern workplaces will also impact government institutions, allowing them to significantly cut the number of government employees needed to provide the same or even superior level of government services. Once this happens, the size of government will shrink and so too will its considerable costs.

Similarly, as we enter into what many forecasters call the age of abundance (2050s), where robots and AI will produce so much that they will collapse the cost of everything. This will also reduce the cost of living for the average person, making it cheaper and cheaper for world governments to finance a UBI for its population.

Overall, the future of taxes in one where everyone pays their fair share, but it's also a future where everyone's fair share may ultimately shrink to nothing. In this future scenario, the very nature of capitalism begins to take a new shape, a topic we explore further in the closing chapter of this series.